Given at the Futures and Options World Post Trade Event, London
Good afternoon. First of all I would like to thank the team at Futures and Options World for inviting me to speak to you today.
It will not be news to this audience that the 2009 G20 commitments on OTC derivatives triggered a sea change for derivatives markets. After all, the key pillars of these commitments around central clearing, organised trading, reporting to trade repositories and capital requirements for non-cleared trades represent a cornerstone of the post-crisis reform agenda.
Today I want to talk to you about the first pillar, central clearing.
A clear intent of the reform agenda has been to transfer risk from bilateral arrangements into central counterparties (CCPs) where it can be netted, better managed and made more transparent. Accordingly CCPs are expected to meet very high regulatory and risk management standards. But this also has clear consequences for the importance of CCPs within the financial system as we have noted in recent Financial Stability Reports.1 I increasingly hear CCPs being described as ‘super-systemic’ or ‘the new ‘Too Big To Fail’.
It is right, therefore that we take stock of the extensive work that has been undertaken domestically and internationally, led by the Financial Stability Board (FSB), to deliver a robust regulatory regime for CCPs; but also to recognise that areas exist where more work is required by the regulatory community, CCPs and their members to ensure we have the right tools to address the risks posed by the increasing importance of CCPs.
Indeed it is an opportune moment to do so. As of the end of 2015, over half of the $384tn global OTC interest rate derivatives market was centrally cleared and over one fifth of the $12tn credit derivatives market was centrally cleared.2 The proportion of derivatives being centrally cleared can be expected to increase significantly following the introduction of the EU’s first mandatory clearing obligations starting in June, and we expect to see the same trend for other asset classes.
I will therefore use my time with you today to reflect on:
- the achievements to date in strengthening the regulatory and supervisory framework for CCPs;
- the challenges that remain, which include the implementation of effective recovery and resolution regimes for CCPs; and,
- the actions the Bank of England (“the Bank”) along with the regulatory community is taking to address these challenges.